Business

Owners can avoid dividends on sales of bailout stock

Article Abstract:

Section 306 has several significant consequences for taxpayers other than its original intention of checking preferred stock bailout abuses. This section was introduced specifically to discourage shareholders selling their preferred stock from gaining earnings and profits from a firm at capital gain rates by preventing such shareholders from availing of the capital gain treatment. Unfortunately, the section also serves to raise the tax cost of preferred stock dispositions because of its treatment of all amounts resulting from the sale of Section 306 stock as ordinary income. The adverse tax consequences of Section 306 may be avoided or minimized with adequate planning. Tax planners dealing with preferred stock dispositions should focus on preventing the stock from being classified as bailout stock, searching for an excepted type of stock disposition, and deciding if the Section 306 stock is to be sold or redeemed.

Installment reporting offers savings through tax deferral

Article Abstract:

The installment sales provisions of the Internal Revenue Code allow taxpayers to defer the recognition of gain earned through a sale of property until such time that they receive cash. Installment reporting is permitted if a realized gain on the transaction is present or if the aggregate selling price is still unquantifiable by the end of the tax year during which the sale was closed. However, taxpayers may choose not to take advantage of the installment sale provisions even if a transaction is qualified. Those who choose to do so must conduct advance planning and transaction structuring because rules on installment sales are complicated. Transactions that are not covered by the installment sales provision include inventory, property held for resale, and revolving credit plans; marketable securities; sale of depreciable property to controlled entities; and property subject to depreciation recapture.

Tax tips for starting up a sideline business

Article Abstract:

Taxpayers considering to put up a second business should be aware of the relevant tax issues that may arise from such a venture. The most common business form for sideline businesses is the sole proprietorship because it is highly flexible and has low barriers to entry. In managing a sideline business, a taxpayer should secure a federal identification number, keep proper records, and use appropriate accounting periods and methods. They should also assess the tax treatment of any startup investigation expenses, which may include travel, research, legal and accounting expenses. Expenses that are not deductible include certain business assets, home offices and transportation expenses. Hobby, entertainment and education expenses as well as passive losses may have a non-business element and therefore may not be deducted.